Entrust New Direction Blog

Many of us have plugged our personal numbers into various online retirement calculators.  How much do I make?  When do I want to retire?  How much do I want to spend after I'm free?  And maybe the most difficult question - How long will I live after I retire?

Unless you're an ostrich (with head-in-sand) about your retirement options, we all want to see how close we are and how long we have to go.  Maybe we want to play with the variables and see if we can quit tomorrow, next year, next decade.  I have tried many, even played with the programming code of one, and I thought they were all pretty much the same, and pretty much accurate. 

Boy was I wrong. 

According to a report by the Society of Actuaries, online retirement calculators may create more harm than help in your quest for golden Golden Years.

(this MAGIC-BRAIN is simple to operate, like an online retirement calculator)

The Actuaries looked at twelve different retirement calculators.  Five free online calculators for laypeople, one which charges a fee, and six which are specifically for financial planning professionals. 

What's the problem with these retirement calculators?

First and foremost, they disagreed with each other on not only what to calculate, but also on the final results.  Even some basics like life expectancy and social security benefits were in dispute between calculators. Some of the calculators didn't account for investment fees (which can be substantial if you're not using a self-directed retirement option), and some gave unrealistically high "typical" rates of return on retirement investment.  In addition, spouses and houses (in all their potential glory and otherwise) are rarely considered.  

Should you try a retirement calculator, be sure to try more than one and cross-reference the information.   Mark Miller, a journalist who specializes in retirement planning and just published a book, The Hard Times Guide to Retirement, recommends one online calculator in particular - the ESPlanner.  Miller gets points from me because he also recommends a non-commissioned financial planner, which only makes logical, and common, sense. The ESPlanner was designed by Boston University prof Laurence Kautlikoff and has free and paid versions. 

Do you have a favorite retirement calculator?  Do you trust it?

Photo courtesy of get directly down

10 Million Americans are enrolled in Health Savings Accounts as of January, 2010, according to a new poll released by America's Health Insurance Plans.  10 million Americans with an HSA represents an increase of 25% in one year, with big increases in large group coverage (33%) and small group coverage (22%).

According to the report, Colorado was among the highest percentage of HSA users by state with 9.2%.

Considering the economy, many small businesses are choosing HSAs to save on healthcare costs for employees and the compnay itself.  Any healthcare change can be difficult, but many employees have discovered their HSAs can be as good as, or better than, their previous health care.

Many of the 10 million have discovered that they can use an HSA to save for future health expenses after they retire. Self-directed HSAs can provide a unique investment opportunity in the healthcare arena. Anyone with a self-directed HSA can invest the funds in real estate, precious metals, or many other investment alternatives. If the HSA holder has investment success, the funds will be tax-free to pay for qualified medical expenses.

HSAs can be used as an investment tool, or just as a savings account and tax break.  Especially with the healthcare overhaul, HSAs will continue to provide many options for Americans in all tax brackets.

Recent surveys from Wells Fargo/Wachovia and The Center For Retirement Research indicate that Americans, including people who should be pretty close to retiring (ages 50-59), are nowhere near ready to retire.

Of course, it's in Wells Fargo/Wachovia's best interest to scare people into using their retirement vehicles, but the numbers of many surveys are similar.  

The Wells Fargo report indicates that pre-retirees (ages 50-59) estimate that they'll require $800,000, but they've only saved $300,000 (median).  They plan on spending 10% of their retirement total each year, which is over double what most advisors recommend.  So not only will this group have not enough money upon starting retirement, they'll also spend it quicker than most experts say they should.

With an organization like the Center for Retirement Research of Boston College, which has no obvious benefit from indicating a dark and stormy retirement outlook, I'm more likely to pay attention. 

Their "National Retirement Risk Index: After The Crash" reports that 51% of households are now at risk of not retiring with a reasonable amount of retirement income.  This is pretty scary, especially considering the many estimates that indicate social security's limited life span and the dearth of real pension plans.

To me, this is motivation to ensure my and my family's retirement comfort, because it tells me that the government will be no help.  Even if the government wanted to help, they'll likely be helping the folks who starting planning for retirement too late, if at all.  

Now my wife has been working on my inherent cynicism, which I consider, of course, realism.  So I'll try to reframe this in a positive light.  Hmmm.  Hardly anyone has enough money saved for retirement.  Many less companies are matching retirement funds.  The folks in 401(k)s who had saved for retirement lost huge amounts in the stock market crash.  Let's see... I got it!  The beach will be empty because everyone but us will still be working!

Photo courtesy of jmenard48.

Uncle Sam wants YOU to save more funds for retirement. Why?

First, the facts.  President Obama announced three ways for you and I to save more retirement funds.

The president wants to make it easier for small businesses to automatically enroll their employees.    Next, there is an option for tax refunds to be converted automatically to US savings bonds.  Third, if employees have sick or vacation time remaining when leaving a job, they can convert that time to retirement funds. 

These stipulations will be enacted without Congress intervention, through the Department of Labor.

At first glance, these may seem to be altrustic moves by the government.  Behavioral economics studies indicate that if one is automatically opted in to a retirement fund, they're unlikely to opt out (and vice versa).  Certainly it's better for people to have more retirement funds, right?  While savings bonds won't exactly turn your retirement dreams to gold, it's good to have more options that aren't the stock market.  And regarding the vacation/sick time, again, more retirement funds and more options are positive. Seems like maybe the government is helping us out?

Or maybe our federal government is just watching out for itself, acting more like Big Brother than a big brother.

Maybe the federalis realize that if we individual citizens don't have enough of our own money saved for our own retirements, we will rely on a social security system that, if status quo continues, will be dead soon. When the number of Social Security collectors goes up a record 19% in the 2009 fiscal year, as reported in USA Today, that indicates to me that:

A) Seniors are not finding supplemental income

and/or

B) Seniors want to take advantage of social security while it's still there

What will the government do with millions of hard-working Americans who rely on social security when there is no social security?

It's a classic conservative versus liberal argument.  Shall we help the people in rough fiscal circumstances or should they be required to take care of themselves?  Should those with sufficient funds be required to support those without sufficient funds?

President Obama also provided a quick sketch of some more possible changes which would require Congressional approval.  My personal favorite is automatically opening an IRA for employees at small companies without 401(k)s. Again, Big Brother stuff, and again helpful to the government.  But my perspective as a tax-payer and a person who is concentrating on retirement funds, this law would also help me as an individual.  Why?  Because if more citizens have their own retirement account, chances are less likely that I will have to pay for any one else's retirement with my taxes.

While the retirement funds are still your money, and while it's not difficult to opt-out, these are nanny state proposals.  One side of the political spectrum would say stay out of my paycheck, and the other would say we're helping you help yourself before it becomes an emergency.   But no matter which side you're on, it's clear that this administration wants you to save, not spend our way to success and happiness.  And it's clear that these will benefit the federal government itself, as much or more than individual Americans.

Painting by James Montgommery Flagg

Like most Americans, Juan did his best.  He worked 50 hours a week, took his kids fishing in the summer and sledding in the winter, occasionally fit in some golf games with his pals.  Every day, Juan tried to be the best dad, best husband, best friend he could be.  Juan also wanted to provide for himself and his family as well as possible, for now and the future.   So Juan contributed to his 401(k).  He figured as long as they matched 3%, he should figure a way to get that free retirement money, even if it meant a little less income right now.  

Then the stock market sunk and his 401(k) dropped 40%.

Then Juan was laid off.

Talk about a flying drop kick to the stomach. 

While surfing the web, ostensibly looking for a new job, Juan ran across a press release targeting the newly unemployed.   "What? I can invest the retirement money however I want?  No way!  I can't believe it!"  Since Juan was screaming in the empty basement, his wife ran downstairs to make sure the idleness of unemployment wasn't atrophying his brains.

When Juan explained about DIY retirement investing, and the discount, Juan's wife, Jenny immediately thought it was a scam.  "I don't think so.  Why haven't we ever heard about this?  The government is going to let regular people decide what to do with their retirement money?  There must be a catch." 

Still, Jenny had a small hope that this self-directed IRA investing was true, because she knew exactly where to invest some of the money - in her friend's new start-up kitchen gadget company.

Juan continued researching and discovered that there is an entire industry of self-directed IRA custodians and administrators, and one was located right in town!  Juan and Jenny happily transferred the funds from their 401(k) into a new self-directed Roth IRA.  Juan and Jenny took the buy direction letter home, and Jenny called her friend the kitchen gadget start-up company CEO.

Her friend the CEO was so excited, she knew Jenny loved the idea.  But then she  remembered the words of her start-up lawyer, "Accredited investors only." 

"Um, Jenny, are you an accredited investor" the CEO asked, knowing the answer.

Jenny's investment dream was smashed.

Jenny and Juan's IRA was not an accredited investor.

Juan and Jenny were able to find some other investments - they put some money in real estate, some in gold and some in CDs, but Jenny watched her friend's gadget company double, triple and quadruple in size.

Has this happened to you?  Maybe you know of a great investment opportunity but you don't have the requirements of an accredited investor.  Questions?  Watch this blog for more information on accreditation and discussions and what the little person can do.  

Kick photo courtesy of mighty mighty bigmac.

Bottles photo courtesy of shkumbin.

The Employee Benefits Research Institutes's 2009 Retirement Confidence Survey could be called the 2009 Retirement Crippling Fear Survey.  Those surveyed who voiced confidence in a comfortable retirement dropped to 13%, the lowest in 16 years of surveys.  72% of people plan to work after retirement, which is essentially not retiring.  32% think Social Security will save them.

Scary.

We don't need a survey to tell us that the stock market, along with the value of most Americans' 401(k)s, has dropped like the New Year's Eve ball in Times Square. We know this.  We also know that many employers are no longer matching 401(k) funds, further devaluing a 401(k) and demotivating the 401(k) holder.  We can safely assume that the federal government is not prepared to support us in retirement.  None of this is new information, but nothing seems to change.

Entrust New Direction, of course, has a horse in the retirement investment race.  We want more people to open self-directed IRAs for many reasons, obvious and not.  But if millions of Americans are not financially ready for retirement, all the rest of us will be adversely affected as well, whether by higher taxes or stress on the public safety net or some as-yet-unknown factor.   So it's in your best interest and mine that as many Americans as possible are financially comfortable in retirement. 

Now to motivate these millions of un-confident eventual retirees.  Is fear the best motivator?  This is, of course, a nebulous question. 

If the fear is immediately apparent (a drooling bear moving rapidly toward you), it's the best motivator.  But how many of us think about retirement savings while working full-time or overtime, raising a family, practicing hobbies, enjoying friends - basically, while living a full life?  If the fear of a destitute retirement doesn't spur you every day/week/month to save and plan, then it's not the best motivator.

Most people fear the unknown.  EBRI reports that 44% don't know how much they'll need for retirement.  Not very confident numbers.  The numbers indicate, however, that ignorance may not be bliss.  If we Americans don't know how much to save and we don't have confidence in the amount we're saving, we must not fear the unknown, or we must not be adequately motivated by that fear.

We may be motivated by a different kind of fear.  From a different point of view, the unknown may be contributing to our collective dilemma.  Most people don't know about self-directed retirement accounts, and many of those who do know about it think they won't be able to successfully grow their retirement account on their own.  They may not know what to invest in, or how to do so.

We talked about the fear of retiring without sufficient funds.  This is a distant fear, certainly not viceral, not real to most of us.  What is real to most of us is the fear of losing our money.  What is real is watching the numbers fall every quarter, knowing that money you earned and saved is now gone, due to some individual or some company's bad decisions or bad luck.

But, as we've heard over and over during this recession, people with 401(k)s don't look at their statement.  They're too scared to see more losses.  But if they're not looking at their statements, they won't close their 401(k) and start investing in a Roth, they won't even shift to a safer less-volatile sanctioned and commissioned investment. They're paralyzed.

Many financial "experts" talk about waiting out the storm.  They say that the stock market will come back within a decade or two.  Maybe so.  No one really knows.  Even if the stock market does come back, there is no guarantee we won't go through a similar recession again. 

If you're reading this, you likely already hold a self-directed IRA or you are considering one.  Maybe you were able to shake off the retirement paralysis, look at your statement, and do something to change the status quo.  Good for you. 

Now for your sake and mine, spread the word.  Tell your story, I'll tell mine, and maybe together we can shake enough Americans out of their retirement investment paralysis so they can start controlling their own destiny. Maybe together we can inspire people to look at their 401(k) statements and stop the bleeding.

Nebula photo courtesy of koolkao. 

Bear photo courtesy of 顔なし.

Locavore, the Oxford American Dictionary word of the year, 2007, and now in Webster's Dictionary, is defined as "one who eats foods grown locally whenever possible."  You, dear self-directed IRA holder, could become a locavestor, i.e. "one who invests retirement funds locally whenever possible".

Of course, a locavore's ideal location is amongst agriculture, while the locavestor would have more options in an urban evironment, but even New York City has farmer's markets, and even Idaho has investment opportunities.

Some ideas for locavesting:

1) Loan money locally                                                                           Your IRA can lend money to your church, your kid's soccer coach, your next-door neighbor.  Many people are paying 15-30% or more for credit card debt.  Your IRA could swoop in, earn 10% interest and save someone you know thousands of dollars.  Don't know anyone in need?  You could put an ad in the local paper.  Plus, the money your lender saves will likely be spent locally, further strengthening your town or city.

2) Buy shares in a local private company.                                                            

While this may not be the best time to start a company, many people who were laid off are doing just that.  They need start-up cash, and your IRA could contribute now, and look forward to a bug payout later.   There are likely local established companies which aren't ready to go public, and they may be looking for a cash infusion to help them along until the economy steadies.  Your IRA could buy into the next Microsoft or McDonald's, before they grow gargantuan. 

3) Buy a foreclosed home in your neighborhood.

Your IRA can vastly improve the neighborhood if you buy a foreclosed home and rent it.  Your IRA gets fat with rental income, and the neighborhood's home values improve.  Or if you don't want to deal with renters, your IRA could buy and hold the home, until the local real estate market improves. 

4)Buy the farm.                                                                                       To combine the best of eating and investing locally, you could find a small agricultural operation and your IRA could become a partner.  Not only could your IRA grow like the rutabagas, your retirement investment could contribute to the health of your community, literally.

If you see my new bumper sticker: "Think Globally, Invest Locally", please wave.  I'll wave back. 

The small benefit to being unemployed, the green fields after the flood, so-to-speak, is that your retirement account can become a self-directed IRA, exploding your investment options wide open. This is also a small benefit to a job in which your employer does not offer a retirement plan - retirement plan freedom.

If you're fortunate enough to have a job right now, and that job offers a retirement plan, you may feel that you have little control over how you can invest your retirement money. You're probably right. You probably only have the option of investing in stocks through your employer's chosen fund(s). But, you may be saying to yourself, at least I can choose between aggressive and conservative stock market investing.

Maybe not.

The Wall Street Journal reports that the Pension Protection Act of 2006 allows employers to automaticaly enroll you in their 401(k) plan and automatically set you to the default investment option.

That's right. Not only can your employer decide that it's best for you to be in their 401(k) plan, but they can also decide how you should invest within your limited options.

Maybe you don't know anyone in your HR department. This should change. Try to discover which nice HR person has some control over your retirement plan and invite them to lunch.

Explain to them that there is a retirement plan option out there called a self-directed IRA, which allows freedom-loving Americans to invest however they choose, almost.

You can sell it to them as a way to differentiate themselves from competitors. New potential hires frequently ask in an interview, "Do you have a 401(k) plan?" Now, HR can answer, not only do we have a 401(k), we have a self-directed retirement plan, and you can choose to invest in real estate, gold, private stock OR public stocks and bonds and mutual funds."

You could tell them that allowing self-direction as a retirement option will improve morale, retain employees and help the general economy. These benfits may not be directly measurable, but they're real.

Many companies are no longer matching funds in their 401(k) plan. Even the organization formerly known as the American Association of Retired People, AARP, is no longer matching employee retirement contributions. Tell HR, if they're not matching, the least they can do is give employees freedom to invest.

If your HR person doesn't see the light, and especially if they're not matching your contributions, you can always open a self-directed IRA. If you want to stop contributing to your handcuffed 401(k), you can open a Traditional or Roth IRA. If you want to keep contributing to your 401(k), you could open a self-directed Roth as well.

With the Roth, your contribution is not tax-deductible, but the earnings are tax-free when you're ready to retire. And if you can wait until 2010 to open a Roth, you can derive many benefits.

Worse case, you got to know your HR person better. Best case, you're the hero of your company because you freed the jailed retirement plans.

photo courtesy of h.koppdelaney 

A small study was released last week detailing how well (or badly) couples talk to each other about money, investments, budgeting, retirement. The results from the 500 couple study (by Fidelity) indicate what we probably already know - couples don't necessarily agree, and don't necessarily communicate about their retirement future or other financial topics.

* only 38% decide on retirement investments together

* 60% disagree on what age they will retire

* 42% differ on planned retirement lifestyle (how much they'll spend on what)

Perhaps none of these results are surprising, but one stat that I found very surprising:

* 85% of couples don't feel confident that either one could assume responsibility of the finances.

This indicates:

1) only 15% of couples share the financial load (or agree on their capability to share the load)

or

2) more than 15% share the financial work, but each person secretly thinks the other is a financial ignoramus

Maybe number 2 is correct, since:

39% don't agree on whether they own an annuity

While the study purports to be a cross-section of society, it's not as if the respondents had no requirements. The couples had to be married, 45-72 years old, with at least $75k income and at least $100k investable assets.

The study doesn't indicate gender, but I'd be interested to know which gender (in heterosexual couples) does more money-work. I'd also like to see if the person who makes more money takes more money responsibility, or if the person who works more hours takes more or less money responsibility.

Perhaps I should solicit a study....

Greenwashing is a new term in the American lexicon, sprouted up thanks to the relatively recent enviro-happy-environment. A mashup of the words green and whitewashing, greenwashing refers to the act of companies exaggerating or fabricating environmental or earth-friendly aspects of the business. This spin tactic is used in the automobile industry, the travel industry, with cleaning products - just about everywhere in the marketplace, including investments.

According to Time magazine, sales of organic food alone (no other green or greenwashed products or services) doubled to $20 billion from 1997 to 2007. $10 billion can buy a lot of green paint. Of course, using spin in marketing is not exactly a new phenomenon, but people who care about how their actions and inactions affect the earth want to know the truth.

And this is where the self-directed IRA pops up. The self-directed IRA leaves the investment decision up to you. If you contribute to a 401(k), you cannot choose which stocks your retirement funds buy. Same with a standard IRA. But with a self-directed IRA, you can be as green as you want to be, and still make money.

One example is the start-up alternative energy (or alternative packaging or alternative transportation) company. Your self-directed IRA can buy private stock in the company, but before you decide, you can visit the factory, meet the workers and learn about the processes. Verify the green-ness yourself.

Your IRA could loan money to individuals in third world nations via various microloan companies. Your IRA could buy an electric car and rent it out. The possibilities are self-limiting. That is the beauty of self-direction.

See some examples of truly green and socially responsible retirement investing.